Pay As You Go (PAYG) Instalments is a system for paying instalments during the income year towards an entity’s or individual’s expected tax liability on business and investment income. The actual tax liability is worked out at the end of the income year when the annual income tax return is assessed. PAYG instalments paid during the year are credited against the assessment to determine whether the entity or individual owes more tax, or is owed a refund.

The Australian Taxation Office (ATO) will contact entities and individuals who are required to pay PAYG instalments, notifying them of their instalment rate. This is calculated according to information in the last assessed income tax return. PAYG instalments may be included as part of an activity statement, or a separate instalment notice may be issued.

The instalment is calculated as the instalment rate multiplied by business and investment income for the instalment period. The main advantage of this method is that instalments are based on income as the entity or individual earns it, instead of a projection based on the previous tax situation. Some entities, and all individuals, may however choose to pay an instalment amount calculated by the ATO, which is based on the most recent tax assessment plus an uplift factor (this is the default method for all individuals, certain trustees, and certain other entities). This decision needs to be made before the due date for payment of the first instalment for each income year, and then applies for the remainder of that year.

Entities and individuals can vary an instalment if they believe the instalment rate, or the ATO calculated instalment, will result in paying more or less than the expected tax liability for the year.

Instalments are generally payable quarterly, but some entities may be able to pay annually and certain large taxpayers are required to pay monthly.

Individuals

PAYG instalments for individuals are generally paid quarterly. Where the most recent annual tax liability on business and investment income is less than $8,000 and certain other conditions are met, individuals can choose to pay an annual instalment. For more information see Introduction to annual PAYG instalments. A special two instalment option is available to some primary producers and special professionals (e.g. sportspersons, artists, inventors and authors).

Partnerships and trusts

Partnerships and most trusts are generally not required to pay PAYG instalments. However, special rules apply to partners and beneficiaries when calculating their own PAYG instalments.

Companies

PAYG instalments for companies are generally paid quarterly. Companies can choose to pay an annual instalment if they meet the criteria that apply to individuals, plus some additional conditions. Companies will be required to pay monthly if their income exceeds $100 million or, they are the head company in a consolidated group or required to remit GST monthly, $20 million. Companies can pay the amount notified by the ATO if their income is less than $2 million or they could pay an annual instalment but chose not to.

Superannuation funds

PAYG instalments for superannuation funds are generally paid quarterly. Superannuation funds can choose to pay an annual instalment if they meet the criteria that apply to individuals noted above. Superannuation funds will be required to pay monthly if their income exceeds $100 million or, they are required to remit GST monthly, $20 million. Superannuation funds can pay the amount notified by the ATO if their income is less than $2 million or they could pay an annual instalment but chose not to.

The government-funded Paid Parental Leave scheme provides financial support for parents to take up to 18 weeks off work following the birth or adoption of a child, with pay at the National Minimum Wage. Dad and Partner Pay provides eligible working dads or partners with up to two weeks of pay at the National Minimum Wage.

Employers receive funds from the Department of Human Services and pay eligible employees in the same way they would normally pay salary or wages.

The Medicare Levy is a tax payable by Australian residents to cover health care charges. It is payable on taxable income, in addition to income tax. Individuals and families on higher incomes who do not have an appropriate level of private hospital cover may have to pay the Medicare levy surcharge.

Medicare Levy is usually calculated at 2% of taxable income. A reduction in the rate is available for people on low incomes and an exemption is available for people in certain categories.
A Medicare Levy Calculator is available on the Australian Taxation Office (ATO) web site to help you work out your obligation.

MORE: See the Medicare Levy Essentials section of the ATO web site.

Advances (or loans), including the forgiving of debts, made by a private company to a shareholder (or an associate of a shareholder) are automatically deemed to be dividends, unless they come within certain specified exclusions. The deemed dividend can only apply to the unpaid present entitlement to which the private company is entitled.

If the advances are converted to a loan before the due date of the company’s income tax return, the advances will not be treated as a dividend. However, this loan must be written and have a maximum term and minimum interest rate.

There is also a requirement that the shareholder make minimum repayments on the loan. If the minimum repayments are not made, a deemed dividend will arise in relation to the shortfall.

Income tax is levied on taxable income, which is calculated as assessable income less allowable deductions. Gross tax on taxable income is reduced by tax offsets, to arrive at net tax payable or refundable.

Individuals

The Australian Taxation Office (ATO) publishes lists of assessable income, allowable deductions and tax offsets for individuals. Sole traders declare business income in their individual income tax return, they are not required to complete a separate return for their business. Tax on individuals is charged at marginal rates. You can use the tax tables to determine how much you are taxed.

Resident tax rates 2019-20

The above rates do not include the Medicare levy of 2%.

Non-resident tax rates 2019-20

MORE: Special rates apply to children and working holiday makers. See the ATO web site for more information on Individual Income Tax Rates.

Companies

A company is a distinct legal entity with its own income tax liability, and is required to lodge a Company income tax return. The company tax rate is 27.5% for base rate entities and 30% for most other companies. Special rates apply to certain types of companies, or companies in certain industries.

Partnerships

A partnership carrying on a business must complete a Partnership tax return to show all income earned and deductions claimed for the income year, and how the net income or loss was shared between the partners. The partnership itself is not a taxable entity. Rather, each partner includes a share of the partnership’s net income or loss in the partner’s taxable income.
Partnerships where the only income is from joint investments (for example, jointly owned shares or rental properties) are not required to lodge a Partnership income tax return. Rather, each partner’s share of the joint income is declared in the partner’s own tax return.

Trusts

Where a beneficiary (not under a legal disability) is presently entitled to a share of net income of a trust, the trustee is generally not taxable. Rather, each such beneficiary includes a share of the trust’s net income in the beneficiary’s taxable income. A trust cannot distribute a net loss to the beneficiaries, the loss is carried forward to offset against net income in later years.

Where a presently entitled beneficiary is under a legal disability (for example, under 18 years of age, a non-resident, or incapable of managing his/her own affairs), the trustee is taxable on the beneficiary’s share of the trust’s net income. The tax rates correspond to the tax rates that would otherwise be payable by the beneficiary.

Where no beneficiary is presently entitled to part of the trust’s net income, the trustee is taxable. The tax rates depend on the trust’s particular circumstances, for example income of deceased estates attracts a different tax rate depending on the stage of administration of the estate.

Superannuation funds

A superannuation fund is a distinct legal entity with its own income tax liability and is required to lodge an income tax return. Different income tax return forms are used by self-managed superannuation funds and other superannuation funds. The superannuation fund tax rate is generally 15%. Higher rates apply to net non-arm’s length income, and contributions by or on behalf of a member who has not quoted his/her tax file number to the trustee.

The imputation system provides a way for Australian and New Zealand corporate tax entities that pay Australian tax, to pass on to their members a credit for Australian income tax they have paid. This prevents the same income from being taxed twice – once when the income is earned by the entity, and again when the income is distributed to members.

Franking account

The franking account is a record of franking credits and franking debits that arise in an income year. All corporate tax entities are required to maintain a franking account, which is a notional account for tax purposes that is separate to the entity’s financial accounts. Corporate tax entities are taxed at the company income tax rate (currently 27.5% for “base rate entities” and 30% for other entities). Typically a franking credit would arise in the franking account when the corporate tax entity pays income tax or receives a franked distribution. A franking debit would arise when the corporate tax entity pays a franked distribution or receives a refund of income tax it has paid. There are numerous other events that may give rise to franking credits or franking debits.

At the end of an income year, an entity that has a deficit in its franking account is liable to pay franking deficit tax.

Franked distribution

The imputation system works by franking a distribution. The general principle is that the entity allocates franking credits to members by attaching franking credits to a distribution. For example, the entity earns $100 of profits and pays $30 tax. The entity pays a dividend of $70 to its members and attaches franking credits of $30. The entity is required to give each member a distribution statement which must contain required information about the distribution. A long list of compliance and integrity measures exists to prevent abuse of the system.

Receiving a distribution

The general rule for individuals receiving a franked distribution (either directly, or indirectly through interposed entities) is called the “gross-up and credit” approach. The member who receives the $70 franked dividend must include $100 in assessable income ($70 + $30 franking credit), and is entitled to a tax offset of $30. If the individual’s tax on the dividend (at marginal rates) is more than $30, the individual will need to pay the difference on assessment. If the individual’s tax on the dividend is less than $30, the net amount is refundable.

The “gross-up and credit” approach also applies to corporate tax entities who receive a franked distribution, with some differences. The main difference is that where the company’s franking credits exceed its tax liability, the excess franking credits are not refundable. Rather, the excess franking credit is converted to a tax loss that can be deducted against income in later years. As noted above, the franking credit attached to the distribution also creates a franking credit in the recipient entity’s franking account, which it can pass on to its members.

Trans-Tasman imputation

The trans-Tasman imputation system allows a New Zealand company to choose to enter the Australian imputation system. This will allow the New Zealand company to maintain an Australian franking account and pay dividends franked with Australian franking credits. Reciprocal rules have been introduced by the New Zealand government to allow an Australian company to elect into the New Zealand rules.

Goods and services tax (GST) is a tax of 10% on most goods, services, and other items sold or consumed in Australia. The general principle is that only the end consumer bears the economic cost of GST. Registered entities bear the liability of collecting GST in the price of sales to their customers, but can offset credits for GST included in the price of business purchases.

Registration

An entity (including an individual) must register for GST if the entity’s annual turnover is $75,000 or more ($150,000 for non-profit organisations). An entity may choose to register if the entity’s turnover is below the threshold. Related entities may form a GST group and be treated as a single entity for GST. A single entity may register separate branches for GST.

Charging GST

A registered entity is generally required to charge GST on all sales of goods and services in Australia, unless a supply is GST-free or input taxed. The entity must provide its customers with a tax invoice for all taxable sales above a threshold of $82.50 ($75 + GST).

Claiming GST credits

A registered entity can claim an input tax credit for GST included in the price of goods or services purchased for the entity’s business. A credit cannot be claimed for:

• Purchases where GST was not included in the price (GST-free acquisitions)
• Purchases used to make input taxed supplies
• Purchases for the entity’s private use.

Rules for specific industries and transactions

A range of special rules apply to sales and purchases by entities operating in specific industries, or certain types of transaction entered into by any entity. Details are available here.

Reporting and paying GST

The reporting periods for GST are called tax periods and can be quarterly or monthly. GST is reported and paid on the entity’s activity statement for its tax period. Entities with an annual turnover of less than $20 million generally have quarterly tax periods, but can choose to have monthly tax periods. Entities with an annual turnover greater than $20 million are required to have monthly tax periods and lodge their activity statements electronically.

In limited circumstances, entities can choose to report and/or pay GST annually. This may involve quarterly instalments plus an annual GST return to reconcile actual transactions for the year.
The rules for attributing GST payable and input tax credits to tax periods differ according to whether GST is accounted for on a cash or accrual basis. An entity can account for GST on a cash basis if any of the following applies:

• the entity is a small business (or non-business enterprise) with an annual turnover of less than $2 million – this includes the turnover of related entities
• the entity accounts for income tax on a cash basis
• the entity runs a type of enterprise that is permitted to account on a cash basis regardless of turnover – generally a government school, a charity, or a gift deductible entity.

Fuel schemes provide credits and grants to reduce the costs of some fuels or provide a benefit to encourage recycling of waste oils. There are various types of schemes:

• Fuel tax credits for business – provides a credit for the excise or customs duty included in the price of fuel used for business activities, in machinery, plant, equipment and heavy vehicles.
• Fuel tax credits – domestic electricity generation and non-profit emergency vessels or vehicles.
• Cleaner fuels grants scheme – encourages making or importing fuels that have a lesser impact on the environment. Eligible cleaner fuels include biodiesel and renewable diesel, as well as low or ultra-low sulphur conventional fuels like low sulphur premium unleaded petrol (PULP) and ultra low sulphur diesel (ULSD). The cleaner fuels grants scheme closed on 1 July 2015.
• Product stewardship for oil (PSO) program – supports recycling oil for environmental sustainability. This includes recycling used oil and using recycled oil.

The former Energy grants credits scheme that applied to alternative fuels and diesel no longer operates for new purchases of fuel.

Fringe Benefits Tax (FBT) is paid on particular benefits employers provide to their employees or their employees’ associates instead of salary or wages. Benefits can be provided by an employer, an associate of an employer, or a third party by arrangement with an employer. An employee can be a former, current, or future employee.

FBT is separate from income tax and based on the taxable value of the various fringe benefits provided. The rate corresponds to the top marginal income tax rate for individuals, including the Medicare Levy (47% for the FBT year ending 31 March 2020). A complicated gross-up factor is applied in calculating the tax – the general principle is that the FBT payable should equal the income tax otherwise payable by an employee on the top marginal tax rate, on the cash salary needed to purchase the benefit (including GST) from after-tax income.

Reporting, lodging and paying FBT

The FBT year runs from 1 April – 31 March. Annual FBT returns must be lodged and tax paid by 21 May each year. Returns lodged through tax agents may qualify for extended due dates. Annual FBT liabilities of $3,000 or more are paid by quarterly instalments as part of the employer’s business activity statement.

If the taxable value of certain fringe benefits provided to an employee exceeds $2,000 in an FBT year, the ‘grossed-up‘ taxable value must be reported on the employee’s payment summary for the corresponding income tax year. The following categories of fringe benefits apply, with specific valuation methods applicable to each category:

• Board – meals provided to an employee and family members, where the employer provides accommodation and at least two meals a day
• Car – a car made available for the private use of an employee or associate (car benefits can be valued using either the statutory formula or operating cost methods)
• Car parking – a car parking space provided for use by an employee or associate, on either the employer’s premises or in a commercial car parking station
• Debt waiver – releasing an employee or associate from an obligation to repay a debt
• Income tax exempt body entertainment – FBT is payable by income tax exempt employers on entertainment provided to an employee or associate by way of food, drink or recreation
• Expense payment – paying or reimbursing a private expense incurred by an employee or associate
• Housing – accommodation provided that is an employee’s or associate’s usual place of residence
• Living-away-from-home allowance – a cash allowance paid to compensate an employee for increased costs, because the employee’s duties require them to live away from their usual place of residence
• Loan – a loan provided to an employee or associate either interest-free or at a discounted interest rate
• Meal entertainment – entertainment provided by taxable employers by way of meals to an employee or associate
• Property – goods provided to employees either free or at a discounted price
• Residual – any fringe benefit (as defined) that does not fall into one of the specific categories

MORE: See the ATO web site for more on FBT categories.

Exemptions, concessions and special rules

A wide range of exemptions and reductions in taxable value apply.

Concessional valuation rules apply to ‘in-house’ fringe benefits The taxable value of certain fringe benefits can be reduced by employee contributions towards the cost of the benefit. Making such contributions can result in a lower overall tax liability, depending on the particular employee’s tax situation and the valuation method that applies to each benefit received.

From 1 July 2017, eligible individuals can make voluntary contributions to their superannuation account under a First Home Super Saver (FHSS) Scheme. The Scheme enables individuals to save for their first home and take advantage of the concessional taxation arrangements that apply in the superannuation system. An FHSS tax is payable if the individuals do not either purchase their first home within a specified period or recontribute an amount into superannuation.

An individual is eligible to participate in the FHSS scheme if he/she is 18 years of age (or older), never used the FHSS scheme previously, and has never owned real estate (except in rare cases).

The key features of the FHSS Scheme are:

• The maximum voluntary contributions under the scheme is $15,000 a year, and $30,000 in total. Voluntary contributions can be non-concessional or concessional contributions and are subject to the contributions caps.
• An individual may apply to the ATO to withdraw up to their “FHSS maximum release amount” , which is the sum of eligible contributions (100% of non-concessional contributions and 85% of concessional contributions) and associated earnings, to use as a deposit on a home. To initiate the withdrawal, the individual must request a “first home super saver determination” (FHSS determination) from the Commissioner, who will then issue a release authority
• The individual’s superannuation fund must pay the amount to be released to the Commissioner, who will withhold an amount for any tax payable and pay the balance to the individual. The amount withheld will reflect the best estimate of the tax payable or, if such an estimate cannot be made, 17% of the amount released (FHSS released amount).
• Concessional contributions and earnings that are withdrawn are included in the individual’s assessable income and receive a non-refundable 30% tax offset. For released amounts of non-concessional contributions, only the associated earnings are taxed, also with a 30% tax offset.
• An individual can enter into a contract to purchase or construct their home provided he/she has applied for and received an FHSS determination, and have applied for a valid request for release under that determination within 14 days of entering into the contract.
• An individual will generally have 12 months after money is released from superannuation to sign a contract to purchase a home or construct a home. The premises must be occupied as soon as practicable and for at least six months of the first year after it is practicable to do so.
• If a home is not purchased, the individual is required to re-contribute an amount into superannuation or pay 20% FHSS tax on the FHSS released amount to unwind the concessional tax treatment when it was released.